Option pricing by transform methods: extensions, unification and error control

Roger W. Lee

Abstract

ABSTRACT

We extend and unify Fourier-analytic methods for pricing a wide class of options on any underlying state variable whose characteristic function is known. In this general setting, we bound the numerical pricing error of discretized transform computations, such as DFT/FFT. These bounds enable algorithms to select efficient quadrature parameters and to price with guaranteed numerical accuracy.